Cleaning up

Unilever (ULVR.LSE, UNA.AS) officially arrived in Shanghai in 1923 with the opening of the Shanghai Soap Factory, but the company’s history in the city began in 1913 when Lord Leverhulme sent his son from England to assess the Chinese market. After being invited to leave the young People’s Republic in 1951, the company retuned in 1986. CHINA ECONOMIC REVIEW spoke with Alan Jope, Unilever’s chairman for Greater China, about the company’s modern relationship with Shanghai and the challenge of domestic competitors.

Q: How has Unilever’s business evolved since you re-entered China in 1986?

A: Between 1986 and 1993 we established 13 joint ventures (JVs), effectively one joint venture per brand or category, and we operated the business that way through the 1990s. We then worked with our JV partners and the Shanghai government to consolidate that down to fewer joint ventures, and then eventually secured 100% control for Unilever, which happened in 2003. In parallel with that, we simplified the structure of the business to cut a lot of costs. We laid down our manufacturing assets in Hefei, Anhui province, and built up our head office presence in Shanghai.

Q: Why the shift to Anhui?

A: It was clear we had to establish a world-class manufacturing base in capability and in costs. When we looked around, Anhui and Hefei specifically provided that environment – a balance of skills, technology center and cost base that was very attractive as a long-term manufacturing site. We were also familiar with Hefei because we’d had a JV there since 1996. Coupled with good government support, we made the decision to relocate our manufacturing. If you compare the cost of Shanghai with our operations in Indonesia and Southeast Asia, China isn’t that competitive. If costs kept rising in Shanghai, it would have made Unilever China uncompetitive.

Q: What was the Shanghai government’s reaction to the move?

A: From a national perspective, if you’re the Minister of Commerce, you want to attract more foreign investment to China. So it’s not only Shanghai or Anhui, but China as a whole that supports Unilever’s expansion. It was on this basis that we got into negotiations with the Shanghai government about relocating our manufacturing assets. And of course, it was a tricky initial conversation – hey, we’re moving jobs out of Shanghai. But when you saw the whole long-term plan, which was to build up our skilled workforce here, and build up our manufacturing base elsewhere, there was strategic alignment.
Q: Was there ever a desire to put the China headquarters outside of Shanghai?

A: I was chatting with one of our multinational competitors who is still in Beijing, and he said increasingly being a multinational based in Beijing feels like you’re in splendid isolation. There’s also a kind of a strategic threat to the Pearl River Delta, because the Yangtze River Delta is geographically well placed and Shanghai is of course emerging as a financial center, a commercial center.

Q: You don’t see being based in Beijing as having any advantages from a lobbying or regulatory perspective?

A: Shanghai as a commercial center gives us access to an extremely good talent pool. It’s a financial center, a center for the creative and marketing industries, so there are more agencies, there’s more digital development. Its infrastructure is excellent. So when you think about what Shanghai offers in that regard, it’s a great home. But since our center of gravity has been here, it wasn’t that we chose to leave Beijing because it lacked something. We’re very happy in Shanghai. It offers pretty much everything we could want as a head office in China.

Q: Some foreign businesses complain that currency restrictions make getting money out of China needlessly difficult. What has your experience been?

A: The reality is that Unilever is invested into China. That pool is relatively unconstrained, and by and large we make in China to sell in China, and we’re driving the business for growth. So the vast majority of the money we make in China, we reinvest in the business here. We’re able to manage the magnitude of remittances we need to make very easily. And the slow appreciation of the renminbi versus harder currencies such as the euro and the US dollar makes China quite an attractive option for Unilever because in addition to the growth that we will generate, we’ll get steady, predictable currency appreciation as well. Really, the relative lack of convertibility is not a burden, hardly at all. It would not make the top 10 issues that we face as a company in China.

Q: What would?

A: The number one by far would be attracting, retaining and developing the talent to support the level of ambition that we have for China. We have a wonderful management team and a turnover rate that’s lower than the consumer products industry average. But nevertheless, this is the hottest of hot talent markets, with a scarce supply of experienced leaders. That’s the thing that keeps me awake at night.

Q: To what degree have you already localized your staff?

A: We have 5,000 employees in China, plus another 5,000 distributor sales staff, and 10,000 working in stores for us. In the operating company we have less than 25 expatriates. As you go up to the apex, or should I say, you go down to the fulcrum of the organization, the percentage increases, but we are 200% committed to developing Chinese talent to lead this business. I sincerely hope my successor will be Chinese.

Q: In general, do you see the business environment here as conducive to foreign enterprises?

A: There’s a lot of rhetoric about the risks of protectionism on international business between China and other parts of the world. As far as Unilever’s concerned, that is not the issue. The issue that we face is the emergence of strong local Chinese competitors. We have to remind ourselves that there are smart, determined, sophisticated, capable, agile consumer-focused Chinese competitors that are more than willing to take our market share if we blink. The urgency for us in China is in building a strong local competitive capability. We’re not worried about currency convertibility, protectionist government policy, or difficulties in markets outside of Shanghai. They’re not major issues because we are a simple business; we’re selling soap and soup in supermarkets, through well-run distributors. We’re not a heavily regulated industry and we’re not an industry in which Chinese and foreign competitors have been treated unequally.
Q: What would you say to those who argue local companies will win because the rules are stacked in their favor?

A: It’s because they’re capable, not because they’re advantaged. You’ve got to not hide behind using "local" as an excuse for someone giving you a good beating. But I would add that, although the regulatory environment has become increasingly transparent and even-handed, woe betide anyone who tries to navigate it without strong local guidance. We’re incredibly reliant on our local government affairs office to ensure we do the right thing, ensure that we’re respected for that by the authorities, and ensure that we approach the authorities in the right way and the right time. If I compare China with the other countries I’ve done business in, I think the bureaucratic structures are still a little bit more labyrinthine.

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